Fonterra drops price guarantee

The guaranteed milk price is currently set at $5.25 a kg compared with a forecast of $4.60 a kg. Photo / Dean Purcell

Fonterra will ditch its controversial guaranteed milk price (GMP) scheme at the end of the current season.

The scheme was first offered as a pilot in the 2013/14 season and has continued through to the current season. It is currently set at $5.25 a kg compared with Fonterra's latest farmgate forecast of $4.60 a kg.

"It is fair to say GMP has had a mixed reaction from our farmers," Paul Grave, Fonterra's head of co-operative affairs, Waikato, said in a note to farmers.

"While some have used it to smooth out on-farm incomes, others felt it did not treat all farmers equally and fairly."

Grave said some farmers will be looking for price management tools to help them with volatility in milk prices.

"We are aware that NZX has done a considerable amount of work in preparing to launch a risk management tool for the milk price and will be meeting in coming weeks with stakeholders to confirm contract details and a timeline for launch," he said.

The tool will allow market participants such as brokers and banks to assist farmers with the ability to hedge their milk price in advance, Grave said.

Applications for the last GMP will open in December 2015 for milk production through to the end of the 2015/16 season.

In June, a total of 45.2 million kg of milksolids was offered by 443 farms under the scheme, more than double the number of farms that applied last year. The offer had to be scaled back by 16.5 per cent.

In August, state-owned farmer Landcorp said its net profit fell by 84 per cent to $4.9 million in the year to June 30, due mostly to lower milk and lamb prices, but the result would have been worse had it not secured a guaranteed milk price from Fonterra at prices that were above the final payout level.

But some farmers have said the scheme runs counter to co-operative's "all for one" ethos. It had also introduced an element of "gaming" into Fonterra's payout system.

The NZX already runs an increasingly popular dairy futures market, which runs alongside the GlobalDairyTrade bi-monthly auction platform.